Double Derivative Actions Revisited

In an earlier
post, we had discussed the concept of multiple derivative actions, and the
decision of the Hong Kong Court of Final Appeal in Waddington,
which held that double derivative actions (shareholder of a holding company
bringing a derivative action complaining of wrongs done to the subsidiary
company) were maintainable. In the comments, it was pointed out that the Bombay
High Court had held in Janardan Pillai that
neither English law nor Indian law recognised the concept of multiple
derivative actions. A recent decision of the Chancery Division of the England
and Wales High Court now clarifies that as a general rule, common law does not
bar multiple derivative actions (and thus, the reasoning in Janardan
Pillai may require reconsideration in light of this development). The
Court also clarified that the statutory changes introduced by the 2006 UK
Companies Act has not deviated from the common law position. The judgment of
Briggs J, in Universal Project Management v. Fort Gilkicker, [2013]
EWHC 348 (Ch), repays close study.

On the first
question of whether the common law recognizes a double derivative action, the
Court adopted Lord Millet’s analysis from the judgment in Waddington.
The Court then considered what is ultimately a question of construction of the
2006 Act – does the new Act modify the common law position in this regard? The
beginning point of the analysis was that a statute will be construed as taking
away common law rights only if it does so expressly or by necessary implication
(see Islington Borough v. Uckac, [2006] 1 WLR 1303). In Universal,
it was contended that Chapter 1 of Part 11 of the 2006 Act exhaustively dealt
with common law derivative claims, and s. 260 of the Act in this context defined
derivative claims, and the section “plainly excludes
claims in respect of a cause of action vested in the company by persons other
than members, such as members of the company’s holding company..”
On the other hand, it was contended that this restrictive definition only
applied to claims under Chapter 1 of Part 11 (i.e. to usual derivative claims),
and the Act did not at all deal with multiple derivative claims. The Court
considered that plainly going by the text, neither argument was so strong as to
enable the issue to be decided on that ground alone. Justice
Briggs observed (at [34]), “neither interpretation produces a result which
is so obviously more satisfactory than the other for it to be safe on that
ground alone to conclude that Parliament must have intended it. As will appear,
a main purpose of the codification of derivative claims in Chapter 1 was to
remove what were regarded (at least by the Law Commission in its report on
shareholder remedies) as complicated, unwieldy and obscure provisions of the
applicable common law and to replace them with a clear and transparent code. A
conclusion that what Parliament in fact achieved in 2006 was to place a
statutory code for derivative claims by members of the wronged company
alongside a continued obscure, complicated and unwieldy common law regime for
derivative claims by others does not commend itself as an exercise in
commonsense. Conversely, a conclusion that by narrowly defining locus
standi for all company derivative claims to members of the wronged company
Parliament abolished a convenient procedural device for doing justice in cases of
wrongdoer control, in a modern context where multi-layered corporate structures
with holding companies and subsidiaries are ever more common, hardly commends
itself as an exercise in justice. There is, on the face of it, no persuasive
reason why Parliament should have wished to provide a statutory scheme for
doing justice where a company is in wrongdoer control, but none where its
holding company is in the same wrongdoer control.”

The Court then
referred to the Law Commission Report pursuant to which Chapter 1 was enacted.
That report indicated that the Commission recommended replacing the common law
regime, but further, the Report also stated that “the question of multiple
derivative actions is best left to the courts to resolve, if necessary using
the power under section 461(2)(c) of the Companies Act 1985 to bring a
derivative action. Accordingly, we do not consider that there should be any
express provision dealing with multiple derivative actions.” The Court
however considered that on a fuller analysis of the Report as a whole, the
position remained ambiguous. The Court then referred to a number of academic
commentators (including the Judge who delivered the judgment in Waddington,
Lord Millet, writing extra-judicially in Gore-Brown) who took the view that the
new Act ‘must be treated as having been abolished
(multiple derivative actions), albeit lamentably’. Other
commentators had taken a different view: for example, Daniel
Lightman, Two Aspects of the Statutory Derivative Claim [2011] LMCLQ 142.
Considering these debates, on balance, Justice Briggs came to the view that
multiple derivative actions were not excluded. He held (at [45]-[47]), First, there was before 2006 a common law procedural device
called the derivative action by which the court could permit a person or
persons with the closest sufficient interest to litigate on behalf of a company
by seeking for the company relief in respect of a cause of action vested in it.
Those persons would usually be a minority of the company’s members, but might,
if the company was wholly owned by another company, be a minority of the
holding company’s members. These were not separate derivative actions, but
simply examples of the efficient application of the procedural device, designed
to avoid injustice, to different factual circumstances… In 2006 Parliament identified the main version of that device,
namely where locus standi is accorded to the wronged company’s
members, labeled it a “derivative claim” and enacted a comprehensive
statutory code in relation to it. As a matter of language, section 260 applied
Chapter 1 of Part 11 only to that part of the old common law device thus
labeled, leaving other instances of its application unaffected… Applying the well established relevant principle of construction,
Parliament did not expressly abolish the whole of the common law derivative
action in relation to companies, even though by implication from the
comprehensiveness of the statutory code it did do so in relation to derivative
claims by members (as defined) of the wronged company. Beyond that, the
assertion that the remainder of the common law device was abolished fails
because abolition was neither express nor a clear or necessary implication…”

What is
particularly noteworthy is the affirmation of the principle that there is no
bar in common law to bringing multiple derivative actions. After holding that
this principle was not affected by the 2006 Act, Justice Briggs observed, “I reach this conclusion with some relief. Not only does it
address the manifest scope for real injustice which the abolition of any
derivative action by members of a holding company would have entailed, and as
graphically described by Lord Millett in his article, but it ensures that
English company law runs in this respect in harmony with the laws of Hong Kong,
Singapore, Canada, Australia and New Zealand, all of which have, albeit by
different methods, ensured that injustice of the type described by Lord Millett
can properly be addressed.” This last comment brings into sharp
contrast the position of Indian law on the point: which holds that as a matter
of common law itself, multiple derivative actions are not permissible. The
principle in Janardan Pillai may thus require reconsideration
in line with these developments.

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